Miles of Aisles: Supermarket Chains Emerge

Moscow's retail supermarkets are importing not only food from Western Europe and the United States, but a valuable management lesson as well: Bigger is better.

From the thicket of independent retailers that evolved after the breakup of Soviet-era food stores, the first Western-style supermarket chains are beginning to emerge.

"In a competitive environment, it's easier for stores to survive if they are part of large trade rings," said Sergei Roshchin, manager of the marketing agency Exima. "It is easier for them to advertise, make bulk purchases at a discount and effectively react to the fluctuating state of the market."

Independent food stores often are too small to survive on their own. Rent for a 4,000-square-meter supermarket in a Moscow residential area costs 100 million rubles a month ($20,300), said Lev Safronov, head of the international department of the Perekrestok trade house. He added that 1,000 square meters of commercial space on Ulitsa Garibaldi in southwest Moscow sells for 1.5 billion rubles.

Moreover, only large companies can afford large-scale expansion of their business, which can run into millions of dollars. The Novy Arbat company recently invested $500,000 in the reconstruction of its 283-square-meter Dieta grocery store, said the company's acting manager, Nadezhda Chugainova. The Seventh Continent company reconstructed the Central grocery store at Lubyanka for a whopping $1.75 million, representatives of the company's marketing department said.

Networks of stores not only can save on operating costs, but can provide customers with a wider selection of goods, which market analysts say is often more important than low prices in attracting consumers.

"Not even prices mean the most to consumers," said Serafim Sarkisov, a marketing expert for the Leading T company. "They want to be able to buy everything in one store."

The Yunikor store sells more than 35,000 brands, said Andrei Livshits, an aide to the supermarket's general director. Chugainova said that the Novy Arbat stores carry more than 30,000 brands.

Leading the way among the chains is the Novy Arbat network of five stores, which company representatives said has a daily turnover of 1 billion rubles ($203,300). Others include Yunikor, which also has five stores, and Seventh Continent, with four stores and a daily turnover of $115,000, said company representatives.

In terms of numbers and geographical reach, Russia's new supermarket chains do not compare to their counterparts in the West, where chains can include hundreds of stores spread over broad regions. But their slow emergence marks the beginning of the future in retailing in Russia.

"The opening of five or six stores can't be called a network, of course," said Alexander Sugrobov, manager of the A&M marketing company. "But it does point to a trend in Moscow that full-fledged retail networks are starting to be created."

And as their numbers increase, the store outlets are looking more and more like one another, a common feature among Western food store chains. "The fact that these stores lack personality and have become very similar to one another is a natural development," said Sarkisov of Leading T. "Supermarkets are identical the world over. That is what stimulates competition and forces stores to lower prices, hold sales, and replenish their assortment. The same will happen here soon."

Leading the way in financing these new ventures are banks, which are attracted by the quick return on investment that retail sales provide. Moskovsky Bank, Sberbank and Capital Savings Bank are all participating in the Moscow city government's program to privatize state stores by offering loans to firms willing to take over their management.

But Sugrobov said banks are willing to fund only chains that already have a sizable amount of money, which serves to further concentrate expansion into a relatively small number of hands.

"Today, banks tend not to trust small companies with their money," he said. "Paradoxically, they give money to companies that already have it."

For example, the European Bank for Reconstruction and Development is supporting a $100 million project to build 11 supermarkets as a part of the Perekrestok network. The key player on the Russian side is the powerful Alpha company, which controls a number of commercial entities including a bank and a cement factory, and whose support Sugrobov said was crucial for the deal.

If the number of investors in supermarket chains remains an elite clique, the clients that frequent the new stores are almost equally so, said Sarkisova. Hard-currency stores, the precursors to the new supermarket chains, were oriented toward the most affluent customers to the exclusion of the majority. She said this trend is slow in changing.

"For the time being, companies prefer to take the 'cream of the consumer crop,'" said Roshchin of the Exima agency. "Before, the wealthy would drive to hard-currency shops in the center, but now they have the same kinds of supermarkets in their own back yard -- in the Belyayev, Tyoply Stan, and Otryadny regions, among others."

But one manager said the movement of retail networks to the outskirts of Moscow is actually an attempt to attract new customers -- people who never shopped in central Moscow's hard-currency stores.

"The needs of affluent customers are already satisfied," said Roshchin. "Now companies will start focusing on middle-class clientele."

"We are taking into consideration the social makeup of residential areas, which is not homogenous," said the head of Perekrestok's international department, Lev Safronov. "We're looking at a selection of more reasonably priced products that are necessary in every home, regardless of one's income."

Representatives of commercial networks are convinced that their future lies mainly in the outer regions of the city.

"We're building stores in residential areas. There's less competition there," said a representative of Seventh Continent's marketing bureau.

Perekrestok's Safronov said his firm's strategy is the same: "We prefer to build stores in regions with underdeveloped infrastructures. Since the lion's share of retail turnover is happening in residential areas, that is where everything new is happening now. The main investments are going to stores in the city's outer regions."